Wednesday, July 02, 2008

Never thought I'd see the day....

'Yesterday brought news everyone thought was likely, but never really expected: Starbucks is closing 600 "underperforming" stores throughout the United States and cutting 12,000 jobs -- roughly 7% of its global workforce. The closures will be made over the next nine months and will cost upwards of $350 million. Annual savings of $100 million are expected.

This is a gutsy move for founder Howard Schultz, who just recently retook the helm with broad pronouncements of returning to roots and reigniting the "emotional attachment with customers" that has been lost over time. After all, Starbucks now has 16,226 locations, up from just 1,886 over the last 10 years. With operations in such faraway lands as Lebanon, Kuwait, Saudi Arabia, Indonesia, Argentina, and Romania, Starbucks' expansionist future once seemed boundless.

Instead, in what is turning out to be a painfully poignant lesson, the coffee behemoth is discovering what it's like to be classified as a truly discretionary expense by customers who've not only checked out emotionally, but are rationally trying to negotiate a difficult economic environment. Whether this means packing around homebrews, stopping by Dunkin' Donuts and McDonald's, or hitting up the office coffee machine, formerly loyal consumers are deserting in droves.

Calling the cuts the "most angst-ridden decision we have made," Schultz showed he's able to embrace unorthodoxy; which comes as a surprise to many who figured he was blinded by his prior successes. It seems, in what is a remarkable transformation for a man obsessed with the metaphysical qualities of his company, that nothing is sacrosanct.

Such creative destruction lies at the heart of healthy capitalism. Instead of spreading like a cancer across the globe, selling a disjointed mishmash of milky coffee, stuffed animals, CDs, books, and branded merchandise, Starbucks has been forced to reevaluate its existence.

A single-minded focus on coffee isn't the key: Indeed, the company is gearing up for the launch of a new cold drink with "a frozen smooth texture and fruit-, dairy-, and yogurt-based ingredients" as described by McAdams Wright Ragen analyst Dan Geiman. The new Italian drink, codenamed "Project Ferrari," will be launched in California this summer, and nationwide in 2009.

Even the story of the drink's origin is fascinating, if slightly disconcerting in its desperation. Within 48 hours of an associate calling it the next Frappuccino, Starbucks' corporate air force descended upon a small town in Italy. A deal was forged in a matter of weeks with a suddenly moneyed Italian.

Although the road ahead is unclear, and no doubt treacherous, Howard Shultz seems reassuringly confident. In his words: "There's a piece of me that is embracing this underdog thing where people are counting us out, because they're going to be wrong. I promise you that. They're going to be wrong."

In the meantime, Dan Geiman is looking for earnings per share of 82 cents this year, down from 87 cents in 2007 on slower traffic and squeezed margins. Shares are trading at 19 times the estimate, inline with its competitors in the specialty eateries segment. Technically, shares are at a critical juncture: Any further fall would enter the abyss.'